1999 Study: Evidence Indicates Minimum Wage Increases Raise Long-Term Unemployment

by Colonel on February 25, 2013

“Several recent studies have challenged the conventional notion that raising the minimum wage reduces employment. A related but relatively unexplored issue is considered by examining the minimum wage’s influence on long durations of unemployment. By considering long term unemployment rates, the previousminimum wage literature is extended by examining the persistence of minimum wage effects. The empirical analysis considers state data from the latter 1980s, a unique period when many states raised their minimum wage above the federal level. The results suggest that a greater minimum wage increases long term unemployment rates. Further evidence indicates that increased minimum wage coverage also raises long term unemployment rates. Subsequent analysis yielded similar patterns for other aggregate labor market measures.

This study examined the impact of state-level minimum wage rates on unemployment rates, focusing on the long term unemployed over the 1984-89 period. The emphasis on long term unemployment extends minimum wage research by considering how unemployment durations for attached low skilled workers are affected. By examining the 1984-89 period, we took advantage of the large cross-sectional variation that occurred when many states raised their minimum wage above the federal minimum rate of $3.35.

We consistently found that the minimum wage is positively related to long term unemployment rates after a lag. However, it was often the case that the sum of the contemporaneous and lag minimum wage coefficients was of only modest statistical significance (i.e. at the 10-20% level). Yet, the reduced form results without the production worker wages suggested a statistically significant minimum wage result at the 5% level. Regardingminimum wage coverage, we found that greater coverage increases long term unemployment, where the statistical significance was stronger than for the minimum wage rate results. One possible factor that influenced the minimum wage rate results was measurement error in estimating the long term unemployment rates. In fact, further analysis using aggregate labour market measures yielded results strongly consistent with long term unemployment patterns. This increased our confidence in the long term unemployment results.

These results suggest that policy makers at the federal and state level should weigh additional total unemployment, as well as the possibility of longer durations of unemployment, in contemplating futureminimum wage increases. In particular, state policy makers should consider the prospect of firm and household relocation in their decision making. Likewise, in an era of welfare reform, these results suggest that some low-skilled welfare recipients may experience long job searches, suggesting that minimum wage hikes may run counter to the work requirement goals of welfare reform. One possible policy alternative is expanding the earned income tax credit. To be sure, this does not mean that policy makers should forego minimum wageincreases, just that they should fully weigh the costs and benefits.

The findings tend to support the standard prediction that there are negative consequences from raising theminimum wage, at least at the state level. Foremost, this was the case even after adjusting for the empirical concerns raised by CARD et al., 1994; and CARD and KRUEGER, 1995. None the less, more research should be conducted to explore if these results apply to other periods besides the 1980s. However, a challenge facing such research is that, unlike the late 1980s, there has been considerably less cross-state variation in minimum wage rates in the 1990s. Another complication is that the Federal Government no long publishes state-levelminimum wage coverage estimates.

” — Copyright 2013 Regional Studies

Do minimum wage hikes raise US long term unemployment? Evidence using state minimum wage rates

Partridge, Mark D; Partridge, Jamie S. Regional Studies33. 8 (Nov 1999): 713-726.

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